Project Management

LectureBudgeting and Cost Control

Overview Cost Estimation Project Budgets Project Costing

Cost Benefit Analysis Payback NPV

Cost Control

Cost Estimation - Factors Hardware and Software costs

including maintenance Travel and Training costs Effort costs (costs of paying SW engineers)

Heating lighting and office space Support staff (accountants, cleaners etc) Infrastructure (network + communications) Facilities (library, refreshments, recreation) Social security, employee benefits, pensions

etc

Salary and Overheads Average Salary for Software Engineers

in the UK (2002) = £25,000 Average Salary for IT managers in the

UK (2002) = £50,000

Overhead is typically 2 x Salary So a software engineer costs

£75,000pa

CoCoMo Constructive Cost Model Uses lines of code as a measure Assumes that the waterfall model of

software development will be used For well understood applications

developed by small teams: PM = 2.4(KDSI)1.05 x M

CoCoMo Example How long will it take to produce

10,000 lines of code?PM = 2.4(10)1.05 x 1 = 26.9PMCost is > £150,000

What if the Programmer(s) is(are) very inexperiencedPM = 2.4(10)1.05 x 1.46 = 39.3PM

CoCoMo2 Uses Object points rather than lines

of code Allows for different development

approaches

See Somerville “Software Engineering” Chapter 23 for more detail

Cost Benefit Analysis Compare the costs of carrying out

a project with the estimated benefits

Identify all costs Development Costs Running Costs – annual costs

Cost Benefit Analysis Include all direct benefits of the project

Will normally accrue on completion – but not always

May be annual benefits/savings

Express costs and benefits in a common unit

£, €, $ etc

What about intangible benefits?

Cost Benefit Analysis Example layout

Project Costs Direct Costs – Costs that can be

directly attributed to a project task (labour, materials etc.)

Indirect Costs – Overheads that do not directly contribute to the project (rent, heating, lighting, admin)

Pricing vs. Costing Price to charge for software

= Cost + Profit Other factors may effect the pricing e.g. competitive environment, loss

leader project Pricing therefore involves:

project managers for costing senior management for pricing

strategies

Costs vs. Budget Cost = how much it will cost to

produce system Budget = how much you will be

allowed to spend on producing system

Top Down Budget High level management set budget

against high level tasks This is then divided amongst lower

level tasks – by lower levels of management

Generally results in: Inaccurate low level budgets Competition for available funds

Bottom up Budget Estimates are made on resource costs

etc. for low level tasks (WBS) These are aggregated to provide direct

costs for the project PM adds indirect costs – admin, etc. and

reserve (and profit figures)

Senior management then cut the budget!

Evaluating a Project

Year 0 1 2 3 4 5

Project AAA -100000 10000 10000 10000 20000 100000

Project BBB -1000000 200000 200000 200000 200000 300000

Project CCC -100000 30000 30000 30000 30000 30000

Project DDD -120000 30000 30000 30000 30000 75000

Which of these projects is the best?

Net Profit

Year 0 1 2 3 4 5 Net Profit

Project AAA -100000 10000 10000 10000 20000 100000 50000

Project BBB -1000000 200000 200000 200000 200000 300000 100000

Project CCC -100000 30000 30000 30000 30000 30000 50000

Project DDD -120000 30000 30000 30000 30000 75000 75000

Year 0 1 2 3 4 5 Net Profit

Project AAA -100000 10000 10000 10000 20000 100000

Project BBB -1000000 200000 200000 200000 200000 300000

Project CCC -100000 30000 30000 30000 30000 30000

Project DDD -120000 30000 30000 30000 30000 75000

Net Profit The most obvious criteria for

comparison Does not give the full picture

regarding the viability of the project

Cash Flow Can the organisation afford the –ve

cash flow required for the development of the project e.g. Project BBB requires an initial

outlay of £1000,000

Cash Flow We need to spend money during

the development of a product We hope to get it back once the

product is finished Therefore projects will have a –ve

cash flow during their development This should become +ve once the

project is complete

Cash Flow Diagram

Cotterell and Hughes page 43

Income

Time

a

b

c

Cash Flow

0 1 2 3 45

-1000

-800

-600

-400

-200

0

200

400£

Thousands

Year

Project AAA

Project BBB

Project DDD

Project CCC

Evaluating a Project

Year 0 1 2 3 4 5

Project AAA -100000 10000 10000 10000 20000 100000

Project BBB -1000000 200000 200000 200000 200000 300000

Project CCC -100000 30000 30000 30000 30000 30000

Project DDD -120000 30000 30000 30000 30000 75000

Payback Period The period of time it takes to

recoup your initial investment A shorter payback period is

preferred as it minimises the amount of time a project is in debt

Payback Period

Year 0 1 2 3 4 5Project AAA -100000 10000 10000 10000 20000 100000Cumulative Total 100,000.00 90,000.00 80,000.00 70,000.00 50,000.00 50,000.00

Project CCC -100000 30000 30000 30000 30000 30000Cumulative Total 100,000.00 70,000.00 40,000.00 10,000.00 20,000.00 50,000.00

Payback Period

Payback Period

-120

-100-80

-60-40

-200

2040

60

0 1 2 3 4 5

Thou

sand

s

YearProject AAA Project CCC

Payback Period Find the payback period for

projects BBB and DDD

Payback Period

Year 0 1 2 3 4 5Project BBB -1000000 200000 200000 200000 200000 300000Cumulative Total -1000000 -800000 -600000 -400000 -200000 100000

Project DDD -120000 30000 30000 30000 30000 75000Cumulative Total -120000 -90000 -60000 -30000 0 75000

Return on Investment Is it really worth investing all that

time, money and effort into the project?

To help make that decision we use the return on investment

The investment will be the initial development costs of the project

Return on Investment Used to discover the percentage of

return on the original project investment

ROI = average annual profit x 100 total investment

Return on Investment For Project AAA

Average annual profit = £50,000/5 (years)

Initial investment = £100,000

ROI = £10,000 x 100 £100,000 ROI = 10%

Return on Investment Calculate the ROI for the remaining

projects and show which one provides the best return

Return on Investment Project BBB

Project CCC

Project DDD

ROI = (100,000/5)/1000000x100 = 2%

ROI = (50,000/5)/100000x100 = 10%

ROI = (75,000/5)/120000x100 = 12.5%

Project BBB

Project CCC

Project DDD

Net Present Value Takes into account the profitability

of a project and the timing of cash flows

Receiving £1000 today is better then receiving £1000 next year Inflation – things will cost more Investment – we lose a year’s interest

Net Present Value - Examples If we invested £100 this year it would

be worth £110 next year (assuming 10% interest rate – not likely)

Therefore if we were given £100 next year it would have been the same as investing £90(ish) this year.

This 10% is called the discount rate

Net Present Value The present value of any future

cash flow can be calculated using the following formula:

Present Value = value in year t (1 + r)t

PV Exercise If I gave you £100 in one year’s

time, what would be its present value?

Assume a percentage rate of 20% 100/(1.20)1

= £83.33 How about in three years?

100/(1.20)3

= £57.87

Net Present Value An alternative approach is to break

down the problem into cash flow and discount factor:

Discount factor = 1 (1+r)t

Therefore: Present Value = Cash Flow x Discount

Factor

Discount factor table

Year 1 2 3 4 5 6 7 8 9 10Discount rate

0.02 0.980 0.961 0.942 0.924 0.906 0.888 0.871 0.853 0.837 0.8200.03 0.971 0.943 0.915 0.888 0.863 0.837 0.813 0.789 0.766 0.7440.05 0.952 0.907 0.864 0.823 0.784 0.746 0.711 0.677 0.645 0.6140.1 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.3860.2 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 0.194 0.162

Net Present Value Net Present Value is the sum of the

present values (aka discounted cash flows)

As can be seen on the next slide, the profit figures can differ significantly using Net PV instead of Net Profit

The payback period may also be effected

Net Present Value

Year 0 1 2 3 4 5 Net ProfitProject AAA -100000 10000 10000 10000 20000 100000 50000Discount Rate 0.03 0.03 0.03 0.03 0.03 0.03Discount Factor 1.000 0.971 0.943 0.915 0.888 0.863 NPVDiscounted Cash Flow -100000 9708.738 9425.959 9151.417 17769.74 86260.88 32316.733

Net Present ValueYear 0 1 2 3 4 5

Project AAA -100000 10000 10000 10000 20000 100000Cumulative Total 100000.00 90000.00 80000.00 70000.00 50000.00 50000Discount Rate 0.03 0.03 0.03 0.03 0.03 0.03Discount Factor 1.00 0.97 0.94 0.92 0.89 0.86Discounted Cash Flow -100000.00 9708.74 9425.96 9151.42 17769.74 86260.88Cumulative Discounted Total 100000.00 90291.26 80865.30 71713.89 53944.15 32316.73

NPV Exercise Calculate the Discounted Cash

Flows and annual NPV for Projects BBB, CCC and DDD

Does this effect the payback period for any of these projects?

More Detailed NPV Example

Year 0 1 2 3 4 5

CostsInitial Hardware Costs £500,000Hardware Maintenance Costs £50,000 £50,000 £50,000 £50,000 £50,000 £50,000

Initial Software Costs £180,000Software Support Costs £20,000 £20,000 £20,000 £20,000 £20,000 £20,000

Total Costs (Cumulative) £750,000 £820,000 £890,000 £960,000 £1,030,000 £1,100,000

BenefitsStaff Savings £220,000 £220,000 £220,000 £220,000 £220,000 £220,000

Total Benefits (Cumulative) £220,000 £440,000 £660,000 £880,000 £1,100,000 £1,320,000

Benefits less Costs -£530,000 -£380,000 -£230,000 -£80,000 £70,000 £220,000

Annual Interest Rate 0.2 0.2 0.2 0.2 0.2 0.2PV factor £1.00 £0.83 £0.69 £0.58 £0.48 £0.40

Annual Cash Flow -£530,000 £150,000 £150,000 £150,000 £150,000 £150,000Present Value -£530,000 £125,000 £104,167 £86,806 £72,338 £60,282

NPV -£530,000 -£405,000 -£300,833 -£214,028 -£141,690 -£81,408

(Cadle and Yeates 2001)

NPV Tutorial Exercise Have a go at the tutorial exercise

handed out in the lecture To do this you will need to think

about Cost Benefit Analysis and NPV

A model answer will be provided next week

Cost Control We have established the projected

costs for the project Each activity will have been given

a cost value (in WBS) As the project progresses we must

monitor the costs

Example 1Task 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

1 52 53 54 105 56 57 108 59 5

60 Budgeted Costs555045403530252015105

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Cost Control -Questions 3 weeks into my 10 week project I

find I have spent over 50% of the budget. What does this mean for the rest of the project? Check original cost plan (BCWS) Check actual work performed – may

be ahead of schedule (BCWP) Check actual cost of planned

activities – may be overspend (ACWP)

Cost Control Monitors work in progress Uses Three Measures

BCWS – Budgeted Cost of Work Scheduled

BCWP – Budgeted Cost of Work Performed

Also known as Earned Value ACWP – Actual Cost of Work Performed

Cost and Schedule Variance Diagram Shows relationship

between BCWS, BCWP and ACWP Lockyer and Gordon Page 84

Variance Analysis BCWP – ACWP = Cost Variance BCWP – BCWS = Schedule Variance ACWP – BCWS = Budget Variance

These can be used to assess the state of the project e.g. negative cost variance with zero

schedule variance implies the project is on time but over budget

Conclusions Costs and Benefits may be incurred annually Development time for a project incurs a

negative cash flow – which may be large A number of factors can be combined to

assess suitability of a project Incorporating NPV into the calculations can

alter the payback period of a project NPV provides a more realistic model as it

takes into account the future value of money

References Hughes and Cotterell “Software Project

Management” (Ch 3+9) Lockyer and Gordon “Project

Management” Cadle and Yeates “Project Management

for Information Systems” Somerville “Software Engineering” A useful link

http://www.cw360ms.com/pmsurveyresults/index.asp